Merrill Lynch’s O’Neill Says Israeli Interest Rates Must Rise

Bill O’Neill, chief investment
officer for Europe, the Middle East and Africa at Merrill Lynch
Wealth Management in London, comments on the Israeli economy.

O’Neill spoke at a press briefing in Tel Aviv.

“We’re seeing a structure of interest rates that are
effectively zero. That to me is simply unsustainable.”

“Inflation has been dominated by the housing market. We’re
likely to see further upside inflation surprises coming through
in the coming months. If rate normalization is delayed, that I
think would delay the day of adjustment further.”

“In an environment where offshore money is continuing to
flow into the economy, supporting certain consumer sectors,
there is a structure of interest rates that are simply too low
for the environment for growth. It’s likely that we will see
further increases coming through and indeed the currency markets
themselves are anticipating this.”

“We’re still likely to see the currency rise against the
dollar in the first half of the year, but there will be a
reckoning and that reckoning will come in the form of higher
interest rates through much of the year.”

“Israel is in a serene state of full employment, one could
argue. There is little in the way of an output gap between
potential and actual output. The sad part about these serene
sorts of steady state environments is that they don’t last.”